SEC approves restrictions to shareholder proposals

Investors say the decision is the result of “an intense, multi-year lobbying campaign” by corporates

Asset owners, asset managers and civil groups have slammed yesterday’s decision by the Securities and Exchange Commission (SEC) to make it harder for shareholders of US companies to file and refile proposals at annual meetings.

Statements issued in the wake of the decision accused the regulator of “blatant pandering to companies”, and alleged that the new rules would “deliberately snuff out” shareholder action on sustainability and social justice issues.

Under the SEC’s new rules, shareholders must hold $25,000 in shares for at least a year, or hold a $2,000 stake for at least three years, to submit a proposal for a vote. Previously, having $2,000 in shares for a year was sufficient to submit proposals.

In addition, the SEC has significantly upped the threshold for refiling a proposal that has been voted on previously. Resubmission will now require 5% of support at first vote, 15% on a second vote and 25% on a third vote. The new rules also prevent smaller investors from aggregating their holdings to submit a resolution.

The decision leaves investors little choice but to vote against directors “to express their discontent over corporate behaviour that threatens their portfolios and the financial system at large”, said Majority Action

The Interfaith Center on Corporate Responsibility (ICCR), a coalition of faith investors, said that the SEC had wrongly assumed that “shareholder proposals are simply a burden to companies with no benefits for companies…when there is 50 years of evidence to the contrary”. Shareholder engagement is a crucial ‘early warning system’ for companies to identify emerging risks, said the ICCR.  

The body cautioned that the new rules would curtail a number of ongoing resolutions addressing “systemic racism” at Tyson Foods, Facebook and Alphabet.

Sustainability-focused boutique Arjuna Capital echoed the point, saying that the decision would shut down “a shareholder resolution process that is now open as a means to address real issues of genuine concern to Black Americans”. According to Natasha Lamb, a Managing Partner at Arjuna, it is “typical for first-time shareholder resolutions to get relatively low vote percentages early on, and then a consensus of support emerges over time”. She estimated that the new rules would reduce the number of shareholder proposals at annual meetings by 37%.

Many responses singled out regulators for bowing to “an intense, multi-year lobbying campaign” by trade associations such as the Business Roundtable and the National Association of Manufacturers.

Amy Borrus, the Executive Director of US corporate governance body the Council of Institutional Investors (CII), said: “The result will be fewer shareholder proposals – and that is precisely the goal of the business lobby that pressed the SEC to make these changes.

“Simply put, CEOs and corporate directors do not like being second-guessed by shareholders on environmental, social and governance matters.”

According to the CII, applying the new rules retroactively to the previous decade would have significantly reduced the number of proposals for independent directors and, political and lobbying disclosures by companies. 

In a statement, US investor campaign body Majority Action, said that the decision had left investors little choice but to vote against directors “to express their discontent over corporate behaviour that threatens their portfolios and the financial system at large”.

The body said: “Though the SEC has undermined the shareholder resolution mechanism, these draconian new rules will not succeed in silencing long-term investors.”

US shareholders may soon face additional restrictions in the proxy voting process, separate to those introduced by the SEC. The US Department of Labour is currently considering proposals which could prevent regulated pensions funds from voting on sustainability-focused shareholder proposals.